Suspect macroeconomic ideas7 November, 2015 at 15:01 | Posted in Economics | 2 Comments
The advocates of free markets in all their versions say that crises are rare events, though they have been happening with increasing frequency as we change the rules to reflect beliefs in perfect markets. I would argue that economists, like doctors, have much to learn from pathology.We see more clearly in these unusual events how the economy really functions. In the aftermath of the Great Depression, a peculiar doctrine came to be accepted, the so-called “neoclassical synthesis.” It argued that once markets were restored to full employment, neoclassical principles would apply. The economy would be efficient. We should be clear: this was not a theorem but a religious belief. The idea was always suspect.
Strange and suspect idea indeed — as is the ‘New Keynesian’ idea that although the economy does not automatically succeed in keeping the economy at a full employment equilibrium, we do not — unless we’re at the Zero Lower Bound — need fiscal policy as long as monetary policy manage to set ‘the’ rate of interest at a level compatible with the targeted inflation.
As Stiglitz has it — this is nothing but “a religious belief.”